Monday, June 28, 2010

Mother Market Springing the Trap

Mother Market seemed to be setting a trap last Thursday, and now seems ready to spring it. The trap was to first get the bears excited then reverse up, and then get the bulls emboldened and fall down. In a fractal finance pattern, the market hit a low last Thursday and since has been in a plateau - the characteristic market fractal of a thrust and plateau. The plateau represents the market seeking order, and in a fractal finance view, can break either way. Humans layer patterns on top to attempt to predict the direction, and in the most delicious of ironies, Mother Market has given them a plateau of maximum confusion:

the plateau could be a fourth wave triangle which is about to continue down

the plateau could be a B wave triangle which is about to thrust up

Triangles are very useful patterns for traders, as they always come as the penultimate pattern, the one before the final wave. In an impulse wave, which breaks into 5 waves (12345), they are common in the fourth wave; in a corrective wave which breaks in three waves (ABC), they are common in the B wave. But you need to know which way it is about to go! In this case, one can interpret the market either way. EWP shows the fourth wave triangle, whose implication is very negative: a sharp drop tomorrow:

The market dropped at the close, and so could be said to already be heading south. And indeed, the futures are down after the close. But there is an alternative way to look at this which sets up the first trap, a bear trap: the triangle is a B wave of an upwards correction, and should head north strongly sometime tomorrow. You can see the alternative in this snip from an EWTrends chart:

Tonight's STU discusses the two possibilities. The most noteworthy indicator in this market is how little buying interest there seems to be. Other than on Friday, when the Russell 2K index was rebalancing, every day for the past week has had negative breadth with (in the NYSE) more declining volume than upside. The STU suggests also that the huge negative TICK at the close today (minus 1141) indicates institutions dumping.

Guidance: A break below the Thurs low (Sp1068) confirms a deeper fall is on and the bullish B-wave triangle is off; and a thrust up indicates the bear trap has sprung, and the market should fly above the gap at Sp1087 and probably head to the next trap, a bull trap, at around Sp1100-1110.

The count down has a clear i-ii at the start. The iii is the sharp drop from 1116 down to 1079 - it is very clear in the emini. Then a slower and less sharp iv to 1096 (again, emini) and the wave v down to 1069. So far so good. And then we have an expanded flat (B lower than A) which should have ended the B wave trinagle today, or be about to tomorrow.

To make this triangle now a wave iv instead of a B wave of 2, extend the wave iii to end at 1069 with the prior end of iii the end of a smaller degree iii inside wave iii.

Once there the bounce Friday is leg a of iv, the drop to a lower low is leg b (it makes this a running triangle), and then we had cde as shown in the chart in the post. Leg e would have ended today and the dump at the end of the day is the start of wave v down to complete wave 1.

It looks like a lot of traps were being set today. After spending most of the overnight session deep in the red, they managed to open the SP positive for about one tick negating a sell signal many were following. Put call ratios for the OEX dropped to absurdly low levels commensurate to the levels seen at the March 2009 low painting a picture that insiders are setting up and accumulating for a powerful rally. Attilla over at Xtrends closed out his short positions and indicated he won't scale into shorts again until the fall (very weird after his uberbearish calls the last few weeks). Rumors are abounding that the commercials are going heavily long but I checked out the latest COT report and didn't see that. (although I am not an expert at COT number crunching) Commercials were still more short than long. I didn't see any group disproportinately positioned one way or the other.

An ending diagonal is not supported by the subsequent market action. An ending diagonal is a bullish formation and should be retraced in less time than it formed. That's Neely and Zoran. Thus, no ending diagonal.

No I meant extreme low levels. There was massive call buying at the March 2009 low as insiders had the green light to go long. ISEE put call ratios were at extremes. Go to traders-talk for today's data in the message board section. It's being discussed all over the place over there.
It's fun watching the futures meltdown in the overnight session. Eminis are now below Friday's low.
I want to see how Europe opens although they should be open now. Tomorrow should be the gap down open and drop to the 1040 level ala the June 1930 fractal.

After a period of weak consolidation Shanghai Composite has broken to new lows today, going down a whopping 4%. In my last post, i suggested volatility ahead, with a possibility of one more new low. This move, while unnerving to most investors, is probably nothing more than a shaking out of weak hands before a reversal(probably a sharp one) - a head fake of sorts.